BoJ: NIRP effective to-date, but costs may limit effectiveness in future – AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, notes that in speaking about Negative Interest Rate Policy (NIRP), Kuroda said, in conjunction with Quantitative and Qualitative easing (QQE), it “has proven to be extremely powerful.”

Key Quotes 

“He noted that since NIRP was introduced on 29 January, “banks’ lending rates, as well as interest rates on corporate bonds and CP, fell significantly, each marking historical lows. The pass-through of the decline in JGB rates to these funding rates since the introduction of the negative interest rate policy has been roughly similar to changes in previous episodes of interest rate cuts.”

“Moreover, new developments relating to corporate finance have been taking place recently; both the issuance of corporate bonds with a maturity of over ten years and firms’ borrowings through subordinated loans have increased.”

Kuroda further noted that while bank profitability had declined, there had not been a tightening in lending conditions.

He said, “Financial institutions’ lending attitudes have continued to be proactive. Thus, we are not in a situation where their intermediary functions are impaired because their profits are squeezed as a result of the negative interest rate.”

However, these were the facts to-date, and Kuroda acknowledged that extending NIRP policy further may be less effective.  He said the effects on bank profitability must be taken into account.  And the negative effects will increase the more prolonged is NIRP.

He said, “In assessing the effectiveness of the negative interest rate policy, the potential impact on the financial intermediation due to its influence on the profits of financial institutions needs to be taken into account. Considering that the profits affect the soundness of financial institutions in a cumulative manner, the impact can vary depending on the duration of the policy.”